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The future is now

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Hydrocarbon Engineering,

If the world is to come anywhere near to meeting its climate-change goals, the oil and gas (O&G) industry will have to play a big part. The industry’s operations account for 9% of all human-made greenhouse-gas (GHG) emissions. In addition, it produces the fuels that create another 33% of global emissions.

Several trends are focusing the minds of industry executives. One is that investors are pushing companies to disclose consistent, comparable, and reliable data. Activist shareholders, for example, are challenging US- and Europe-based oil majors on their climate policies and emissions-reduction plans. Investors are also increasingly conscious of environmental issues. In the five markets examined by the Global Sustainable Investment Alliance — Australia and New Zealand, Canada, Europe, Japan, and the US — sustainable investments reached assets of US$30.7 trillion in early 2018, one-third of total investment. At September’s UN climate summit, an alliance of the world’s largest pension funds and insurers (representing US$2.4 trillion in assets) committed itself to transitioning its portfolios to net-zero emissions by 2050.

At the same time, renewable technologies have been getting cheaper. In the US, the cost of solar—both photovoltaics (PV) and utility scale has fallen more than 70% since 2011, and the cost of wind by almost two-thirds. By 2025, they could be competitive with natural gas–based power generation in many more regions.

Other forces are also coming into play. Although there is still no global market, carbon taxes or trading systems cover 20% of worldwide emissions, compared with 15% in 2017, according to the World Bank. Many European governments plan to implement binding GHG emissions targets and are drawing up national energy and climate plans.

Options for the oil and gas sector

To play its part in mitigating climate change to the degree required, the oil and gas sector must reduce its emissions by at least 3.4 gigatons of carbon dioxide equivalent (GtCO2e) a year by 2050, compared with 'business as usual' (currently planned policies or technologies) — a 90% reduction in current emissions. Reaching this target would clearly be easier if the use of oil and gas declined. But even if demand doesn’t fall much, the sector can abate the majority of its emissions, at an average cost of less than US$50/t of carbon dioxide equivalent (tCO2e), by prioritising the most cost-effective interventions. Process changes and minor adjustments that help companies reduce their energy consumption will promote the least expensive abatement options.

The specific initiatives a company chooses to reduce its emissions will depend on factors such as its geography, asset mix (offshore vs onshore, gas vs oil, upstream vs downstream), and local policies and practices (regulations, carbon pricing, the availability of renewables, and the central grid’s reliability and proximity). Already, many companies have adopted techniques that can substantially decarbonise operations — for example, improved maintenance routines to reduce intermittent flaring and vapour recovery units to reduce methane leaks. Cutting emissions is not necessarily expensive. An onshore operator found that about 40% of the initiatives it identified had a positive net present value (NPV) at current prices and an additional 30% if it imposed an internal carbon price of US$40/tCO2e on its operations.

One option is to implement initiatives that offset emissions by tapping into natural carbon sinks, including oceans, plants, forests, and soil; these remove GHGs from the atmosphere and reduce their concentration in the air. Plants and trees sequester around 2.4 billion t/yr of CO2. The Italian energy giant ENI has announced programmes to plant 20 million acres (four times the size of Wales) of forest in Africa to serve as a carbon sink.

Other companies are looking at how to fund these offset programmes; Shell offers Dutch consumers the possibility of paying to offset emissions from retail fuel. The cost of carbon sinks is uncertain; estimates range from US$6 to US$120/tCO2e in 2030, depending on the source and the sequestration target.

Any company can invest in offsets. On the whole, however, upstream and downstream operators have different sets of options at their disposal. This article will now examine the options for the downstream sector, specifically.

What downstream operators can do

Downstream operators are exploring many of the same ideas as upstream operators, such as energy efficiency and the electrification of low to medium-temperature heat and energy. But they have distinctive options as well.

Energy efficiency

Efficiency is a factor in every part of the industry, of course, but new downstream- specific technologies can make a big difference. Waste-heat-recovery technology and medium-temperature heat pumps in refineries, for example, reduce the amount of primary energy used in distillation. One company saved €15 million in capital expenditures by forecasting its required steam usage hour by hour and incorporating this into a thermodynamic model to determine the required specifications for replacement equipment.

Green hydrogen

Hydrogen production through electrolysis has become both more technically advanced and less expensive. Bloomberg New Energy Finance estimates that the cost of hydrogen could drop as much as two-thirds by 2050. Using renewable energy rather than steam methane reforming (SMR) to power the electrolysis could offer refineries a way to reduce emissions—a result known as 'green hydrogen'. An alternative, 'blue hydrogen', uses SMR plus CCUS.The attractiveness of the different technologies depends on the local economics — in particular, the availability of cheap storage capacity for CCUS or cheap renewable electricity.

Green hydrogen is not a speculative technology in oil and gas. Shell and ITM Power, a UK-based energy storage and clean-fuel company, are building the world’s largest hydrogen electrolysis plant at a German refinery, with support from the European Union. Revenue will come from selling hydrogen to the refinery, which will use it for processing and upgrading its products and for grid-balancing payments to the German transmission system. That business model justifies the installation.

High-temperature electric cracking

In refining, several pilot projects use electric coils (instead of fuel gas) to provide heat. The technology is still at an early stage and small in scale. Moreover, the economics are sensitive to the price of electricity compared with gas and to the options for selling the fuel gas. Those economics improve if investment is coordinated with the natural investment cycle to support additional capital expenditures—and, of course, if power can be purchased or generated under favourable financial terms.

Greener feedstocks

Replacing some conventional oil feedstocks in refineries with bio-based feedstocks or recycled-plastic materials (initially, through pyrolysis or gasification) would also reduce emissions — not only Scope 1 but also, to a large extent, Scope 3 emissions. In an increasingly decarbonising world, this may extend the lifetime of refining assets.


The oil and gas sector will play an important role in the global energy transition; how it will face that future is a matter of strategy. As transparency increases, so may expectations. Customers, employees, and investors are already starting to distinguish the leaders from the laggards. Oil and gas companies that get ahead of the curve could find themselves better positioned for change.

Written by Chantal Beck, Sahar Rashidbeigi, Occo Roelofsen, and Eveline Speelman, McKinsey & Co.

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